UAE: Consumers with loans, mortgages to benefit as banks brace for more rates cuts

The anticipated interest rate cuts of up to 2.0 per cent from the fourth quarter of 2024 to 2026 present challenges for savers and lenders, but offers benefits to individual and business borrowers.

The decision by GCC central banks to reduce lending rates, in response to the Federal Reserve’s 50 basis point cut from a 23-year high, is seen as a relief for individuals, consumers, and businesses with debt, auto loans, mortgages, and other forms of borrowing with reduced EMIs. However, it will mean reduced earnings for individual savers, depositors, and lenders, including banks, in the coming months, according to financial experts.

“A rate cut is often good news for borrowers, but it can have the opposite effect for savers. Lower interest rates mean that the return on savings products, like savings accounts, money market accounts, and certificates, can decrease,” said a retail banking executive of a local bank.

He explained that lower rates on auto loans mean that a borrower's monthly payments could decrease, allowing him/her to save money or purchase a more expensive vehicle without straining their budget.

James Mathew, managing partner of UHY James Chartered Accountants, noted that lower interest rates from the UAE central bank will make personal loans more affordable, resulting in smaller payments and less interest paid over the loan term.

“If you are borrowing, the rate cut is likely to work in your favour. Keep an eye out for updated rates on our loan products, and do not hesitate to reach out if you are considering refinancing or applying for a loan,” said James.

Sajith Kumar P.K, managing director at IBMC Financial Professionals Group, highlighted that interest rates directly influence consumer behaviour. “Borrowing becomes cheaper when rates go down, so it makes large purchases such as home mortgages and auto loans on credit more affordable. Borrowing is more expensive when rates go up, putting a damper on consumption. Higher rates do benefit savers who get more favourable interest on deposit accounts.”

Sukesh Govindan, CEO of 10X Properties, pointed out that with the 50 basis point cut and more reductions expected in the coming months, it might be a good time to look into refinancing mortgage and take advantage of lower rates. “For new homebuyers, this could mean lower monthly payments and a better chance to get into the house of your dreams.”

However, for a fixed-rate mortgage, rate cuts will have no impact on the EMI. Govindan added: “Low rates can be good for potential homeowners but fixed-rate mortgages don't move directly with the rate changes. Central bank rate cuts change the short-term lending rate but most fixed-rate mortgages are based on long-term rates that don't fluctuate as much as short-term rates. Similarly, the impact of a rate cut on credit card debt also depends on whether the credit card carries a fixed or variable rate.”

Experts explained that for savers, lower interest rates make it harder to maximise savings and preserve the capital built while interest rates have been higher. An easy short-term move to protect savings is to shift funds into a high-yield savings account, which offers higher interest rates than traditional savings accounts.

Fitch Ratings noted that a series of rate cuts in the offing will likely reduce the profitability of most GCC banks earnings due to the faster repricing of interest-earning assets (IEAs) than interest-bearing liabilities,

J.P. Morgan Research expects the Fed to cut rates by another 50 bp at its next meeting in early November. Fitch expects the Fed to cut US interest rates by a further cumulative 200bp by June 2026, and most GCC central banks are likely to follow with similar cuts due to exchange-rate pegs.

Ramy Habibi Alaoui, associate director, Financial Institutions – Banks, and Redmond Ramsdale, senior director and head of Middle East Banks Ratings and Islamic Banking, both of Fitch Ratings, said the UAE banks are likely to be the most affected while Saudi banks are likely to be less hard hit due to their higher proportion of fixed-rate financing, although the impact for each bank will depend on its level of retail financing.

Overall, most GCC banks are positioned for rising rates, with assets repricing faster than liabilities and a significant proportion of low-cost deposits in current and savings account. “We estimate that the short-term positive repricing gap for GCC banks (excluding Kuwaiti banks) represented 6.6 per cent of total assets at end-2023, with about 60 per cent of IEA repricing within 12 months,” Fitch analysts said